Germany’s growth prospects are looking increasingly weak due to high inflation, disrupted supply chains and the damage flowing from sanctions on Russia, but a recession remains unlikely, economists say.
“Supply-chain problems and high inflation appear to have stopped the post-Covid recovery in its tracks,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a research note. The already stalled recovery has been further postponed by Russia’s invasion of Ukraine.
The Ifo business climate index, Germany’s main leading economic indicator, recovered somewhat, increasing to 91.8 in April from 90.8 in March, according to data published Monday. But it is still well below the pre-war level and is consistent with Capital Economics’ view that German GDP is likely to contract in the second quarter.
The German government lowered its forecast for the country’s growth to 2.2% this year as the war weighs on the economic outlook. The government had forecast 3.6% GDP growth in January, before Russia invaded Ukraine.
A group of German economic research institutes, including the Ifo Institute, also lowered their growth outlook for this year to 2.7% from 4.8% due to the war in Ukraine. Similarly, Scope Ratings has cut its forecast for economic growth in Germany to between 2% and 2.5%.
“While a recession for the full year remains unlikely, our current growth expectation is approximately 2% lower than before the escalation of the Russia-Ukraine war,” Julian Zimmermann, analyst at Scope Ratings, told The Wall Street Journal.
Melanie Debono, senior Europe economist at Pantheon Macroeconomics, takes a similar view. “We don’t expect a recession in Germany, unless there is an instant embargo on Russian energy imports,” she told The Wall Street Journal. A gradual weaning off energy imports from Russia will weigh on the German economy, but whether this pushes the eurozone’s largest economy into recession depends on how long it takes, she said.
In a scenario of a sudden stop of Russian energy imports to Germany, a recession would become significantly more likely as energy rationing and prioritization of critical industries would become necessary, Mr. Zimmermann said. Such disruption would also run into 2023 as it would take time to establish new oil and gas supply links, Mr. Zimmermann added.
Yet a complete and sudden stop of Russian energy supplies to Europe isn’t expected in Scope Ratings’ baseline scenario, rather an accelerated gradual decline of Russian energy imports, which would be manageable for Germany and all European economies, Mr. Zimmermann said.
“Russia’s invasion of Ukraine has increased already strong inflationary pressure,” by further increasing energy prices, Mr Zimmermann continued.
This pressure is felt across the spectrum for German consumers, not just in electricity bills. Consumer prices rose 7.3% on year in March measured by national standards, the highest reading since the autumn of 1981. Excluding energy prices, the inflation rate in March 2022 would have been 3.6%, according to the German statistics office Destatis.
April’s inflation data will be published Thursday. Economists polled by The Wall Street Journal forecast the annual inflation rate at 7.2%, slightly below the record level posted in March.
Rapidly rising inflation exerts pressure on real incomes and household spending and recent German indicators are already pointing toward a significant contraction in spending. The drop in the GfK consumer sentiment to an historic low for May is a clear sign that the war in Ukraine and higher inflation are weighing heavy on consumer sentiment, Ms Debono said.
“Consumers are seeing their purchasing power melt away,” she added.
But Ms. Debono also sees a number of factors mitigating the impact of rising inflation on household consumption. First, she highlights that consumers have a big pile of savings from the 2020 and 2021 lockdowns. In the fourth quarter of 2021, the savings rate was still higher than before the pandemic, which means that consumers were still saving more than usual, Ms. Debono says.
“We suspect that households will both reduce the savings rate and draw down their stock of savings to support spending,” she says.
The second factor is that governments are ramping up fiscal support to offset the impact of rising electricity bills, which should also help.
At first glance, Germany may seem more vulnerable to the negative effects of this war than its European peers, due to its higher reliance on Russian energy. But for Ms. Debono, this is not the case.
“Its large manufacturing base will suffer from the renewed deterioration in global supply chains but consumers in Germany are arguably not as vulnerable as those elsewhere,” Ms. Debono said. According to Pantheon Macroeconomics’ analysis, Spanish and Italian consumers are most exposed to rising energy prices.
“Fiscal support will be a determining factor. Governments will step in, and this makes it difficult, at this stage, to know which country would be hit hardest,” Ms. Debono said.
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